If you own properties which qualify as Furnished Holiday Lettings (FHLs), this is the Smart Team’s guide on whether you qualify for tax relief on the rental income you receive.
Do my properties qualify as FHLs?
To be counted as an FHL and in turn qualify for tax relief, your property must be:
- In the UK or the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway
- Furnished – the property must be sufficiently furnished, and your visitors must be entitled to use the furniture
- Commercially let – the property must be let with the intention of making a profit. This criterion also applies to property let out of season to cover costs, even though profit was not made.
- Available for letting at least 210 days of the tax year
- Actually let for a minimum of 105 days of the tax year
- Not occupied by those who stay for more than 31 days (long term tenants) for more than 155 days of the tax year. In exceptional circumstances; such as if the holidaymaker has an accident or is forced to extend their holiday over the 31-day limit due to a delayed flight; this criterion is lifted.
Though properties let in the UK and EEA are both counted as FHLs, the losses from a property in the UK during a tax year cannot be set against those of another in the EEA. Separate records must be kept regarding these properties.
What can I claim?
If your properties qualify as FHLs:
- You can claim Capital Gains Tax relief for traders
- You are entitled to plant and machinery capital allowances
- The profits count as earnings for pension purposes
Letting conditions – ‘Averaging’ and ‘period of grace’ elections
If you find yourself unable to let your property for the minimum of 105 days, you can apply one of two elections to help you reach the occupancy threshold.
Your first option is the ‘averaging election’. This can be employed if you own more than one qualifying FHL property.
This election is used when one of your properties does not meet the letting condition of 105 days. Let’s say you own four cottages in the UK, and you let them out for the tax year 2016-2017. Cottage 1 is let for 124 days, Cottage 2 for 129 days, Cottage 3 for 116 days and Cottage 4 for 52 days, due to unfavourable circumstances in the area which discourages holidaymakers from choosing to stay there.
Looking back at your records, you notice that Cottage 4 falls below the minimum letting condition period.
Here, you can employ the averaging election, by dividing the sum of the days let by the number of properties you own. The total sum of days let is 421 in this case, meaning the average (421/4) is 105. With this election in place, Cottage 4 clears the minimum threshold.
You can’t use this election to average both UK and EEA FHLs. You can make an averaging election up to one year after 31 January following the end of the tax year.
Your second option is the ‘period of grace’ election.
If you are genuinely unable to meet a letting condition even with intention to do so, you can employ this election for a maximum of two years since the property last met the condition. To prove you had intent to meet the threshold, you must show you have marketed the property similarly as you did in previous, successful years, or that the letting was cancelled due to unforeseen circumstances such as bad weather.
If, after four years and two consecutive period of grace, elections your property still hasn’t met the threshold, it will cease to qualify as an FHL.
It is possible to use both an averaging election and a period of grace election consecutively, if employed using the guidelines above.
You can claim Capital Allowances on the purchase of items within the property that are ‘embedded.’
These include working fixtures such as lighting and heating units, as well as static fixtures such as kitchens and electrical systems.
Buying and Selling FHLs
As of 1 April 2016, Stamp Duty Land Tax (SDLT) when buying a second property or buy-to-let property went up by 3%.
When selling, FHLs are treated as ‘trade’ for tax purposes, meaning you could possibly claim Entrepreneur’s Relief. Here, any chargeable gain is taxed at 10%, if it meets the qualifying conditions.
If you sell a holiday letting and then reinvest the profit in another holiday letting, there is the possibility of
deferring the gain until the new property is sold. If the property is given away, the gain could also be ‘held over’ until the event of a sale by the recipient of the property.
However, if a capital loss occurs, it is automatically offset against any capital gains made during that taxation period. Unused losses are carried forward, and can be offset against future capital gains, should they occur.
Get in touch
Should you wish to discuss the taxation of FHLs in further detail, or if you have any questions regarding Inheritance Tax in relation to this topic, don’t hesitate to get in touch by calling 01202 577 500 or email us on [email protected].